Imagine this scenario: a compounded drug that is used for decades to prevent premature births and costs about $10 to $20 a dose is suddenly shoved to the side by a newly approved FDA injectable that its manufacturer - which did little clinical trial testing - starts selling for $1,500. The new price tag amounts to $30,000 per pregnancy, although the manufacturer insists a patient assistance program will ensure its medication, which is a form of progesterone, becomes available to every woman who requires treatment.

For those who invested in KV Pharmaceuticals - a little-known drug maker with a very troubled record that saw its former chairman barred from participating in federal healthcare programs and a subsidiary plead guilty to felony charges for selling oversized pills - the price hike represents the proverbial pot of gold at the end of the rainbow. A stock that traded for just 61 cents last summer reached $13.55 this past winter, shortly after the FDA approval and the ensuing publicity about the new cost for the drug, which is called Makena.

Of course, some things really are too good to be true. The pricing move by KV, not surprisingly, attracted outsized criticism - two U.S. Senators wrote the U.S. Federal Trade Commission to demand an investigation into price gouging, the American Congress of Obstetricians and Gynecologists and the American Academy of Pediatrics released a joint letter complaining about the price and describing the patient assistance program as woefully inadequate, and the March of Dimes threatened to end a long-standing corporate relationship with the drug maker.

Just a few weeks after granting approval, the U.S. Department of Health and Human Services reacted to the hoopla with an unexpected and unusual move of its own - the Food and Drug Administration suddenly declared that enforcement actions against compounding pharmacies that continued to make lower-cost progesterone would not be pursued. This quickly undermined the once-seemingly invincible position held by KV management which, weeks earlier, had sent cease-and-desist letters to compounders warning them of legal action if they persisted in making a drug for which KV had exclusive rights to sell for seven years, since Makena was approved under the Orphan Drug Act. KV responded a few days later by slashing its price by 55%.

So what might we take away from this extraordinary chain of events? The Makena episode amounts to a cautionary tale for a raft of players - regulators, policy makers, investors, physicians and consumer groups - about the vagaries ofpricing in an era of mounting concern over the cost of health care (and medications in particular). And while the situation appeared unique, or at least involved a set of circumstances that may not arise very often, the lessons may likely resonate widely.

For one, the Makena controversy prompted calls to re-examine the use of the Orphan Drug Act, which involves a basic bargain: a drug maker is offered seven years of exclusive marketing in exchange for delivering a medication that treats a rare disease. The program is widely seen as providing a reasonable tradeoff for all concerned. But in this instance, questions were raised about the extent to which granting such a monopoly was appropriate, given that KV may have spent close to $200 million on a pair of clinical trials but, ultimately, relied considerably on federally funded research published several years earlier to gain FDA approval.

One suggestion, which was made by consumer activist Jamie Love of Knowledge Ecology International, is to hold hearings before a drug is granted approval under the Act in order to determine whether a drug would become profitable - without marketing exclusivity. Presumably, this would encourage greater discussion about pricing that might also encourage other manufacturers to come forward with rival plans of their own. Whether this is practical - politically or otherwise - is unclear, but the notion underscores a weakness in the law that allows a monopoly to be exploited.

Another issue being picked over is the reaction from the FDA. By deciding not to pursue enforcement actions against compounders, the agency inserted itself into a discussion

that was largely dominated by pricing. This suggests HHSwas responding to political pressure from politicians and others, such as insurers, which suddenly faced much higher costs for preventing premature births and, by extension, othermaladies where similar approval and pricing scenarios may one day arise.

Pricing, of course, is a hot-button topic, but the FDA has regularly avoided discussing the cost of medications, preferring the mantra of letting the marketplace determine how patient access plays out. This time, though, the FDA seems to have gotten swept into the debate about cost, which becomes a slippery slope. For instance, when it comes to pricing, how high is too high? Which afflictions warrant intervention?After all, newly minted cancer meds command increasingly startling prices. And will the agency consider taking similar steps in the future on an across-the-board basis or only when controversy erupts and publicity becomes uncomfortable? How should such decisions be made?

There is also the question of jurisdiction. Compounding pharmacies are, generally speaking, overseen by a board of pharmacy in each state. The KV team was infuriated by the FDA decision, but the agency argued that an enforcement action can still be pursued if a compounder grinds out medications that are "unsafe, of substandard quality, or are not being compounded in accordance with appropriate standards for compounding sterile products." In other words, the FDA views adulterated or misbranded meds made by compounders as violating the Food Drug and Cosmetic Act, raising the prospect that KV would have to convince the courts that the FDA reached too far. Win or lose, this takes time.

Of course, physicians and hospitals may still choose to administer Makena. After all, the injectable remains the only drug approved by the FDA for preventing premature births. There may well be decades of comfort levels associated with using compounded progesterone, but any subsequent mishap now takes place in a different context. If something were to go wrong, liability may be viewed differently, since a government-endorsed alternative is available. Whether such thinking will become prevalent, though, is uncertain, at best. Pharmacies have been compounding progesterone since 1956, and the outrage from ACOG and AAFP underscores a belief that widespread use will continue.

Then there is the experience of the March of Dimes. Officials at the advocacy organization maintain they were unaware of the Makena pricing plan until it was disclosed. After the price was known, March of Dimes issued a scathing letter that expressed disappointment with KV, which had contributed about $1 million over the past decade to various do-good programs the organization has run. But online patient forums contained cynical comments that March of Dimes officials did not respond publicly until after the barrage of negative media and the demand by politicians for the FTC to investigate. The suggestion was the March of Dimes hoped to avoid being caught choosing between a sponsor and preserving its image as a champion of moms and health care.

In the end, the March of Dimes decided that KV had gone too far. Even after the drug maker lowered its price to $690per injection and attempted to reaffirm its commitment to

a patient assistance program, the organization severed ties with KV. And in a final swipe, the organization reiterated its belief that progesterone is a "safe and effective treatment

for prevention of preterm birth" and a hope "that more obstetricians will consider it for appropriate patients." Its action most likely mitigated the skepticism that was floating around the internet about its posture and, perhaps, sent a wider signal to other advocacy groups that corporate ties come with aprice that, at times, may have to be reevaluated in order to maintain credibility.

As for KV, the drug maker may no longer be able to forecast $1 billion or so in Makena revenue by 2015, but its stock certainly has a higher profile and its investors - big and small - are likely to be rewarded for their bet, especially those who put their money down before the FDA approval earlier this year. But its managerial team has, nonetheless, been chastened by the episode. And their example is one that other drug makers would do well to study. The shifting political landscape and the increasing emphasis on the cost of health care indicate that certain assumptions about high pricing and anticipated reactions are no longer valid. For KV and other drug makers with similar plans, the glee over FDA approval of Makena and all that would follow was, well, premature.

Ed Silverman is a prize-winning journalist who has covered the pharmaceutical industry for The Star-Ledger of New Jersey, one of the nation's largest daily newspapers, for more than 12 years. Prior to joining The Star-Ledger, Ed spent six years at New York Newsday and previously worked at Investor's Business Daily. Ed blogs about the drug industry at Pharmalot, at www.pharmalot.com. He can be reached at ed.silverman@comcast.net.

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